By Steven K. Beckner

WASHINGTON (MNI) – Neither the European debt crisis nor a possible
slowdown in Chinese growth is likely to derail the global economic
recovery, St. Louis Federal Reserve Bank President James Bullard said
Monday in Japan.

Bullard, a voting member of the Fed’s policymaking Federal Open
Market Committee, said the U.S. economy is likely to have achieved
“complete recovery” in the third quarter, though employment growth will
continue to lag behind.

Once complete recovery is achieved, it will be time for the U.S.
government to slash its budget deficit, Bullard said in remarks prepared
for delivery to the Institute of Regulation and Risk of North Asia in
Tokyo Bay, Japan.

Bullard did not address U.S. monetary policy or the appropriate
timing of monetary tightening in his speech text, but he suggested that
one ironic result of the European crisis has been to effectuate a de
facto “aggressive” easing of credit conditions.

By reducing long-term interest rates while the Fed leaves
short-term rates unchanged at near zero, the flood of capital into “safe
haven” Treasury securities has acted “like an aggressive and successful
monetary policy action,” he said.

After contracting in 2009 in wake of the financial crisis, “the
global economy is now in the middle of a powerful recovery led by Asia,”
said Bullard, who went on to assess risks to the perpetuation of that
recovery.

“With Asia as a leader in the global recovery, a risk is that the
Asian economies might falter in some way, causing global growth to slow
appreciably,” he said, noting in particular that “many Asian equity
price indexes have declined substantially over the past two months,
including those in China, possibly pointing to bleaker days ahead.”

But having raised that risk, Bullard went on to minimize it.

“I would council caution in interpreting the volatile equity price
data, as these markets are prone to overreaction and exaggeration,” he
said.

Bullard granted that “one might worry that some type of ‘bubble’
has formed in the Chinese economy in particular and that a disorderly
unraveling of that situation might somehow derail the Asian-led global
recovery.” But he added, “I do not think that we should interpret China
in this light at the current juncture.”

“The more sensible interpretation” is that “China has in the past
year simply returned to its rapid growth path and is likely to remain on
that path for a considerable period of time,” he continued. “(T)he big
picture is that rapid Chinese growth can easily be reconciled with the
fundamentals, and so the risk of a sudden slowdown in China derailing
the global recovery, while certainly not zero, seems limited.”

Nor did Bullard see any chance of the United States lapsing back
into recession.

“The macroeconomic recovery in the U.S. remains on track and may be
complete in the third quarter,” he said. Estimating that 1.25% growth
per quarter is needed in the second and third quarters for real GDP to
surpass its previous peak of the second quarter of 2008, he said that
“seems like a reasonable possibility over the next two quarters
combined.”

“Given these conditions, I expect the U.S. recovery in GDP to be
complete in the third quarter of this year,” Bullard said, adding,
however, that employment growth relative to production is “far below”
peak levels as firms have increased productivity rather than hiring.

Bullard was hopeful that “firms will most likely have to hire
workers during the remainder of 2010 to keep up with increasing demand.”

Although some of his colleagues have emphasized the negative
spillover effects of the European debt crisis, Bullard said “the crisis
has produced at least two advantages for the U.S. in the near term.”

Not only has the European crisis pushed up the value of the dollar
and reduced the cost of energy and other commodities, it has slashed
10-year Treasury note yields from 4.0% to less than 3.2%.

“To the extent this type of movement is sustained, it affects all
trading in U.S. financial markets and acts like an aggressive and
successful monetary policy action,” Bullard observed. “If the situation
in Europe continues to spark market volatility, the flight to quality
will sustain lower yields in the U.S. than would otherwise be the
case….”

While the European sovereign debt crisis is “a serious matter,”
Bullard said “the global recovery at this point looks very strong and
seems unlikely to be derailed.”

Bullard said the near $1 trillion package of European government
guarantees and International Monetary Fund loans to aid indebted
European countries and stabilize the euro “have a good chance of
success.”

Even if Southern European nations end up resorting to debt
restructuring, he said that is “not unusual in global financial markets
and can be accomplished without significant disruptions.”

He called it “far-fetched” to believe that governments will give up
guarantees of the largest “too-big-to-fail’ financial firms and
therefore saw little chance that the European crisis will lead to huge
new losses and a financial contagion.

But Bullard used the woes of Greece and others as an object lesson
for the United States.

“The U.S. fiscal situation is difficult as well, with high deficits
and a growing debt-to-GDP ratio,” he said. “The U.S. has exemplary
credibility in international financial markets, built up over many
years. Now that the U.S. economy is about to achieve recovery in GDP
terms, it is time for fiscal consolidation in the U.S.”

“Irresponsibly high deficit and debt levels are not helping the
U.S. economy and could damage future prospects through a loss of
credibility internationally,” he continued. “A substantial and credible
fiscal adjustment could set up the U.S. for a sustained period of
growth, as it did in the 1990s.”

** Market News International **

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